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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Overview Puradyn, which has been in business for over 25 years, and designs, manufactures, and sells the Puradyn® System, a high-efficiency bypass oil filtration system and replacement filter elements. We generate revenues through the initial sale of the bypass oil filtration systems and through the sale of the replacement filter elements. We purchase component parts for unit housing and filter elements and the component parts are assembled, packed and shipped from our facility in Boynton Beach, Florida. Sales of the Company's products depend principally upon acceptance and demand by end-user customers and OEMs. We focus our sales strategy on the development of OEM and individual end user relationships, along with building distributor sales efforts to continue expansion of a nationwide distribution network that will not only sell but also install and support our product. We currently have approximately 100 active distributors in the U.S. and internationally. We also focus our sales and marketing efforts to target industries open to innovative methods to reduce oil maintenance operating costs and overhaul cycles. These industries are also searching for new and progressive technologies to optimize their equipment use, including bypass oil filtration. While this is a long-term and ongoing process, we believe we have achieved a degree of product acceptance based on the expansion of existing strategic relationships we have with Nabors Industries, Inc. and other end-users and distributors, including: · On April 9, 2014, management announced the receipt of an initial order from one of its distributors for Puradyn Systems for a military contract planned for 750 generator sets to be built by a major military contractor utilizing John Deere engines starting in October of 2014 and concluding in September of 2017. Following receipt of this initial order, we expect to receive future orders through our distributor to supply Puradyn systems for this military contract in accordance with military build requirement over this period. Puradyn is a second tier supplier to this military contractor and as such does not have a separate contract with the military for this order. If the military carries out its contract in full, it is estimated to generate around $300,000 in revenue over the three years. Sales for first six months of 2014 were approximately $9,600. Our net sales for the second quarter of 2014 increased 29% from the comparable period in 2013. This increase is attributable to sustained increased activity from a number of our larger accounts at the beginning of the third quarter of 2013. We believe that industry acceptance will grow in fiscal 2014 based in part upon our progress this year. However, there can be no assurance that any of our sales efforts or strategic relationships will meet management's expectations or result in an increase in our revenues. Going Concern The Company's financial statements have been prepared on the basis that it will operate as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses each year since inception and has relied on the sale of its stock from time to time and loans from third parties and from related parties to fund its operations. These recurring operating losses, liabilities exceeding assets and the reliance on cash inflows from a current stockholder have led the Company's management to conclude there is substantial doubt about the Company's ability to continue as a going concern. 11 --------------------------------------------------------------------------------Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We believe the critical accounting policies in Note 1 to the financial statements appearing elsewhere in this report affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results may differ from these estimates under different assumptions and conditions. Results of Operations for the Three-months Ended June 30, 2014 Compared to the Three-months Ended June 30, 2013 Net Sales Net sales increased 29% in the second quarter of 2014 as compared to the second quarter of 2013. The increase in sales was primarily due to two customers who increased purchases accounted for 69% of the increase in sales. In addition a couple of our new distributors are beginning to generate sales in their areas, and helped to contribute to the increase in the second quarter. We are dependent upon sales to a limited number of customers. Sales to three customers accounted for approximately 16%, 12%, and 10%, respectively, for a total of 38% of the net sales for the three-months ended June 30, 2014, or 65% of the increase over net sales in the same period in 2013. While we remain dependent upon sales to a limited number of customers, our sales dependence is now on a larger group of customers. Sales to three customers accounted for approximately 20%, 19%, and 15%, respectively (for a total of 54%), of the net sales for the three-months ended June 30, 2013. Cost of Products Sold Gross profit, as a percentage of sales, increased from 16% in the second quarter of 2013 to 36% in the second quarter of 2014. The increase in gross profit was also attributable to sales of higher margin products, sales to customers in higher margin price categories and reduced charges for slow moving inventory. The last area that contributed to the increase in gross profit resulted from better pricing in the cost of a few of our key components, purchased during the period. We have obtained alternative sources for some of these components and this has contributed to improved margins. Salaries and Wages Salaries and wages were decreased by 6% for the quarter ended June 30, 2014 compared to June 30, 2013 as a result of reduced expenses for employee benefits, primarily stock option expense. 12 --------------------------------------------------------------------------------Selling and Administrative Expenses Selling and administrative expenses decreased by 15% for the three months ended June 30, 2014 from the comparable period in 2013. This decrease was due to a decrease in travel, marketing expense and professional fees to outside consultants. As we extend our reach to international customers and develop more specialized products for niche industries, we anticipate that travel and marketing costs will increase, but all other expenses will remain stable for the balance of the year. The following table lists the major categories of expenses included in Selling and Administrative expenses: Three Months Ended June 30, 2014 2013 Change Employee Benefits $ 43,655 $ 54,390 $ (10,735 ) Travel & Marketing 50,515 56,305 (5,790 ) Depreciation & Amortization 5,892 5,805 87 Engineering 191 13,431 (13,240 ) Professional Fees 38,510 50,861 (12,351 ) Investor Relations 302 1,841 (1,539 ) Occupancy Expense 24,757 27,920 (3,162 ) Patent Expense 22,772 21,206 1,566 Stock Compensation 1,139 1,260 (120 ) Bad Debts (32 ) 174 (206 ) Other Expenses 24,568 17,291 7,275 Total $ 212,269 $ 250,484 $ (38,215 ) Interest Expense Interest expense increased 16% for the three months ending June 30, 2014 as compared to the three months ending June 30, 2013 and was incurred primarily on the outstanding balance of the stockholder notes payable. The increase was due to higher borrowings. The Company pays interest monthly on the notes payable to the stockholder at the LIBOR Daily Floating Rate plus 1.4%, which was a weighted average of 2.66% as of June 30, 2014 as compared to 2.24% as of June 30, 2013. Results of Operations for the Six-months Ended June 30, 2014 Compared to the Six-months Ended June 30, 2013 Net Sales Net sales increased 42 % in the six months ending June 30, 2014 compared to the six months ending June 30, 2013. The majority of our sales increase in the 2014 period resulted from orders from two customers in the amount of approximately $197,000, or 17%. Sales to two customers individually accounted for 18% and 14% (for a total of 32%) for the six months ending June 30, 2014. Sales to two customers individually accounted for 16%, and 12% (for a total of 28%) for the six months ending June 30, 2013. Cost of Products Sold Gross profit, as a percentage of sales, increased from 23% in the six months ending June 30, 2013 to 38% in the six months ending June 30, 2014. The decrease in cost of goods sold, which generates a higher gross profit, is primarily attributable to the reserve for slow moving inventory of $42,702 recorded during the six months ended June 30, 2013 and decreased allocation of manufacturing overhead due to lower than expected sales. 13 -------------------------------------------------------------------------------- Salaries and Wages Salaries and wages decreased by 3% for the six months ending June 30, 2014 compared to the six months ending June 30, 2013. This decrease was primarily due to decreased expenses associated with employee benefits. Salaries and wages, as a percentage of sales are 47% for the six months ending June 30, 2013 and 32% for the six months ending June 30, 2014. Selling and Administrative Expenses Selling and administrative expenses decreased 11% for the six months ending June 30, 2014 compared to the six months ending June 30, 2013. The following table represents the major components of Selling and Administrative expenses for the six months ended June 30, 2014 and 2013, and the change of those components over their respective periods: Six Months Ended June 30, 2014 2013 Change Employee Benefits $ 98,426 $ 112,739 $ (14,313 ) Travel & Marketing 111,912 120,332 (8,420 ) Depreciation & Amortization 11,143 11,267 (124 ) Engineering (1,673 ) 17,496 (19,169 ) Professional Fees 87,004 106,821 (19,817 ) Investor Relations 908 2,594 (1,686 ) Occupancy Expense 49,220 54,378 (5,158 ) Patent Expense 46,810 43,593 3,217 Stock Compensation 2,132 2,424 (292 ) Bad Debts 1,026 391 635 Other Expenses 43,293 36,149 7,144 Total $ 450,201 $ 508,184 $ (57,983 ) The changes in most components of selling and administrative expenses for the six months ended June 30, 2014 from the comparable period in 2013 are the result of the same factors which impacted period to period changes described earlier in this section. Our investor relations expense increased as a result of the cancellation of our contract with Emerging Markets. We anticipate that our expenses for investor relations will remain at or below 2013 levels for the remainder of the current year. In May 2011 we entered into an agreement with Monarch Communications, Inc., to pay a portion of our public relations firm fees in stock. This agreement was renewed in May of 2012 and 2013. This amount has been reported as a marketing expense. Amounts reported as stock compensation for 2014 and 2013 represent the value of options issued to Directors pursuant to our 2000 Non-Employee Directors Stock Option Plan. We anticipate expenses for the remainder of 2014 should be similar to those incurred in the six months ending June 30, 2013. Interest Expense Interest expense increased for the six months ending June 30, 2014 as compared to the six months ending June 30, 2013 and was incurred primarily on the outstanding balance of the stockholder notes payable. The increase was due to higher borrowings. 14 --------------------------------------------------------------------------------Liquidity and Capital Resources As of June 30, 2014, the Company had cash of $99,077, as compared to $161,503 at December 31, 2013. At June 30, 2014, we had negative working capital of ($639,149) and our current ratio (current assets to current liabilities) was 0.65 to 1. At December 31, 2013 we had negative working capital of ($769,907) and our current ratio was 0.57 to 1. The decrease in working capital deficit and increase in current ratio is primarily attributable to decrease in cash and inventories, offset by an increase in accounts receivable and prepaid expenses. We have incurred net losses each year since inception and at June 30, 2014 we had an accumulated deficit of $57,756,621. Our net sales are not sufficient to fund our operating expenses. Historically, we have relied on the sale of our stock from time to time and loans from related parties to fund our operations. During the six months ended June 30, 2014 we raised an additional $550,100 from stockholder loans. During the six months ended June 30, 2013, we raised $665,155 from stockholder loans. As of June 30, 2014, we owe our principal stockholder who is also an executive officer and director of the Company $10.4 million for funds he has advanced to us from time to time for working capital, which includes an additional $550,100 advanced during the six months ended June 30, 2014. Interest expense on our loans was $119,982 for the six months ended June 30, 2014. We do not currently have any commitments for capital expenditures. Our current cash position is insufficient to cover our current operating needs for the next twelve months, and we do not have any external sources of working capital. While we anticipate an increase in cash flows from 2014 sales activity, we expect additional cash will still be needed to support operations, meet our working capital needs, and satisfy our obligations as they become due this year. Although we are actively seeking additional equity investments, we have no firm commitments from any third parties and there are no assurances we will be successful in attracting additional capital. In addition, as set forth above, we owe our stockholder $10.4 million which is due on December 31, 2015 or (i) at such time as we have raised an additional $7 million over the $3.5 million raised in prior offerings, or (ii) at such time as we are operating within sufficient cash flow parameters to sustain operations, or (iii) until a disposition of our company, such as an acquisition or merger, occurs. We do not have sufficient funds to pay this loan when it becomes due and there are no assurances our stockholder will extend the due date. We continue to address liquidity concerns because of inadequate revenue growth. As a result, cash flow from operations is insufficient to cover our liquidity needs for the next twelve months of operations. We have implemented measures to preserve our ability to operate, including organizational changes, a reduction and/or deferral of salaries, reduction in personnel and renegotiating creditor and collection arrangements. If budgeted sales levels are not achieved and/or significant unanticipated expenditures occur, or if we are not able to raise additional investment capital, we may have to modify our business plan, reduce or discontinue some of our operations or seek a buyer for part of our assets to continue as a going concern through 2014. There can be no assurance that we will be able to raise additional capital or that sales will increase to the level required to generate profitable operations to provide positive cash flow from operations. In that event, it is possible that stockholders could lose their entire investment in our company. Cash Flows Operating activities For the six-month period ended June 30, 2014 net cash used in operating activities was $572,133, which primarily resulted from the net loss of $469,603. In addition to the cash used in funding the operating loss, the utilization of cash in operations is also attributable to the increase in accounts receivable of $218,133 as a result of our increased sales. For the six-month period ended June 30, 2013 net cash used in operating activities was $684,241, which primarily resulted from the net loss of $890,899. Investing activities For the six months ending June 30, 2014, $36,504 was used in investing activities for the purchase of software and capitalized patent costs. For the six months ending June 30, 2013, $42,832 was used in investing activities for the purchase of equipment. 15 -------------------------------------------------------------------------------- Financing activities Net cash provided by financing activities was $546,141 for the six months ended June 30, 2014, which was composed of $550,100 in loans from our stockholders as described above, offset by $3,959 in payments of capital lease obligations. Net cash provided by financing activities was $661,519 for the six months ended June 30, 2013, which was composed of $665,155 in loans from our stockholders as described above, offset by $3,636 in payments of capital lease obligations. ITEM 3. |